CHAPTER 23

Quick Check
1. a. True.
b. False.
c. False.
d. False.
e. False.
f. False.

2. a. If money growth = 25%, 50%, 75%, seignorage=162.5, 325, 487.5

b. In the medium run, if money growth = 25%, 50%, 75%, seignorage=162.5,
200, 112.5. The fall in real money balances associated with higher ongoing
inflation reduces the potential for seignorage. Part (a) did not allow for this
effect.

3. a. Would decrease the effect of inflation on real tax revenues.

b. Would decrease the effect of inflation on real tax revenues.
c. Would decrease the effect of inflation on real tax revenues, but would also
have other effects. The income tax can tax the rich at a higher rate than the
poor, but the sales tax rate is the same for rich and poor.

4. The end to the crisis depends on shifting the composition of taxes. Workers are
already paying an inflation tax.

The central bank must make a credible commitment that it will no longer
automatically monetize the government debt. Although a currency board would do
this, it is a drastic and perhaps unnecessary step.

Price controls may help, but price controls without other policy changes only cause
distortions and are a recipe for failure.

A recession is not needed, but it may happen. Although nominal rigidities are less
important during hyperinflations—which implies that the sacrifice ratio is small—
the issue of credibility remains. Unless firms and workers believe in the
stabilization program, a severe recession may be the result.

The problem has two parts: (i) there is an ongoing fiscal deficit that the government
is unable or unwilling to finance from nonmonetary sources and (ii) the central bank
is willing to monetize the debt. The order in which these issues are resolved
ultimately depends on the political realities. The fiscal authority could eliminate the
deficits. If it does not do so, the central bank could commit not to monetize
government debt. However, this could drive the government into default on its
bonds.

5. max (0.9-∆M/M)(∆M/M)=45%.

6. Novo